28th February 2018 - Our Corporate Governance Expert Group contributed to our response to the FRC's consultation on its proposed revisions to the UK Corporate Governance Code.
Our Corporate Governance Expert Group contributed to our response to the FRC's consultation on its proposed revisions to the UK Corporate Governance Code.
You can read our full response here (pdf).
We welcomed the FRC's decision to reduce the length of the UK Corporate Governance Code, as it would ensure that the Code was focussed on outcomes.
However, we noted our concern at the proposal to remove the exemptions regarding board evaluation, annual re-election, and the composition of audit and remuneration committees offered to smaller companies outside the FTSE 350. We argued that this would follow a one-size-fits-all approach which would penalise smaller companies on the Main Market of the London Stock Exchange. We commented that placing these additional obligations on smaller, growing companies will result in significant added costs and compliance burdens, removing the incentive for these companies from using regulated markets and thus access to a deeper pool of potential investors. We encouraged the FRC to recognise that the size of companies on regulated markets vary from as little as £26 million to over £150 billion.
Furthermore, we noted our concern that the current drafting of Principle A, purportedly extending directors’ duties to include contributing to wider society, goes beyond Section 172 of the Companies Act 2006. We commented that the legislation's current drafting strikes the right balance of having a duty to shareholders, whilst also having the responsibility to take account of other stakeholders. We recommended that the Code state that boards should consider how a company contributes to wider society and engagement with its stakeholders in the context of its culture and strategy, alongside the promotion of medium to long-term shareholder value.
Although we supported the objective that boards should establish a method for gathering the views of the workforce, we commented that whether any of the proposed methods in Provision 3 achieved meaningful engagement would depend on their implementation.
We agreed that 20% of votes cast against a resolution should be considered 'significant', as this was consistent with the Investment Association’s register. However, we suggested retaining the current phrase ‘significant vote against’ in the Code and refer to 20% in the Guidance, in order to cater for companies with a concentration of shareholders.
We commented that the UK Corporate Governance Code should not apply an arbitrary time period of nine years as a period whereby a non-executive director is considered independent. We argued that being independent is a state of mind. We also noted that small and mid-size quoted companies would be most acutely affected by any non-executive and/or chair who does not meet the stated criteria, as the prevalence of founder chairs is much higher in these companies. That said, we acknowledged that all companies should consider independence every year. We added that companies should clearly explain - both in their annual report, as well as in their discussions with shareholders - why a non-executive director and/or a chair is considered to be independent in character and judgement.
We supported extending the Hampton-Alexander recommendation beyond the FTSE 350, so that companies of all sizes disclose the gender balance on the executive committee and direct reports to the executive committee. We noted that diversity in all its forms enables more effective decision-making and better utilisation of the talent pool, so that companies are better suited to face the business challenges of tomorrow.
We generally supported the wider remit for the remuneration committee. However, we suggested that Principle O refer to “workforce policies and practices on remuneration including those regarding the living wage and zero hour contracts”, in order to clarify that not all aspects of employee policies are in the remuneration committee’s remit.